Why are President Trump’s trade policies so erratic? It is almost as if they were scripted by a reality TV producer who added explosive escalations, rash reversals, and captivating capitulation to turn viewers into binge watchers.
Surely that is not the explanation, but the outcome is the same. US trade policy has put us all on an emotional rollercoaster the likes of which the world has never seen before. The latest episode was the most dramatic by far.
On 2 April 2025, viewers witnessed an astounding reveal. America imposed unprecedently high and broad tariffs chosen according to an entirely unanticipated formula (White House 2025). The US called these “reciprocal tariffs.” On 4 April, China retaliated and the US counter-retaliated, and China counter-counter retaliated. US-China tariffs ended at over 100% each way. And then the denouement.
A close-to-complete-capitulation by the US came on 9 April – driven by the threat of financial market meltdown and what could have been a second Global Financial Crisis. But the 100%-plus tariffs on US–China trade remain for now.
This whole episode of Season 2 of The Trump Tariff Show was so dramatic that observers reacted with relief to the “only 10%” tariff on everyone. Are we ready to click on the “next episode” button?
But what does “reciprocal” mean when it comes to tariffs?
Donald Trump argued that US tariffs had to be raised to reciprocate the cost of trade barriers enforced by its trading partners. But:
- How does his administration’s view of reciprocity match with the principle envisaged by the legal framework governing multilateral trade?
- How does such interpretation of reciprocity relate to that other fundamental rule, non-discrimination, as implied by the most favoured nation (MFN) clause of the General Agreement on Tariffs and Trade (GATT)?
This column makes two points. First, the 2 April 2025 tariffs – which will surely go down in history as the “2025 Trump Tariffs” to echo the “1930 Smoot-Hawley Tariffs” – undermine the global trade system since they violate two key WTO principles: non-discrimination among WTO members (so-called MFN treatment), and respect for tariff concessions that were bound in previous tariff negotiations.
Second, these violations are especially worrying since they are not temporary. They reflect an ideological shift in the US from the view that free trade generates gains for all to the mercantilist view of trade as a zero-sum game – or worse, a power game where only one partner, the surplus partner, gains wealth and power at the expense of the others (Hirschman 1945, Clayton et al.)
The real rules of the game: What does the GATT say?
Let us first clarify the present rules of the game and then consider the historical, intellectual, and ideological roots of the regulatory framework.
The rule of non-discrimination is nested in the MFN clause of the beautiful article one of the GATT:
“[…] any advantage, favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties”.
It implies that all trade partners, foreign and domestic ones, must be treated equally, granted equal market access, like the most favoured nation. This principle reverts the very concept of favouritism (“unfair support shown to one person or group”, according to the Cambridge Dictionary) as every nation must be treated like the most favoured one.
Moreover, the MFN rule in the GATT is also based on the principle of non-reciprocity in the absolute level of trade barriers. This means that countries do not need to give reciprocally the same conditions of market access. In other words, country A must grant to all of its partners the same level of tariffs, but these can be different in country B or in country C from those of A. This implies that non-discrimination does not prevent individual countries from being different, it does not force them all to converge to the same level of duties. For example, developing countries can have more restrictive conditions of market access than advanced ones. Subsequent rounds of trade liberalisation after WWII have achieved a global reduction in tariffs, as all countries participating in the round had to grant some concessions by reducing their tariffs at the margin by an amount that would entice equivalent extra values of imports and exports. But the absolute level of tariffs did not need to be at, or converge to, the same level. This is the principle of marginal or first difference reciprocity (Bhagwati 1988, Bown et al. 2017):
…first-difference reciprocity – that is, tariff cuts are to proceed via bargaining that reflects a balance of perceived advantages at the margin rather than via negotiations that result in a perceived full equality of market access and reverse market access (or what, in modern American parlance, is pithily described as a ‘level playing field’). (Bhagwati 1988: 36)
The principle of reciprocity claimed by the US administration reverts such GATT rules as it calls for, and pretends to impose, similar conditions of bilateral access with its trading partners, i.e. the same absolute level of tariffs (and tariff equivalent of non-tariff barriers) and consequently introduces discriminatory tariffs in the destination country. This is a blatant violation of the GATT rules, and even more so because the hypothetical cost to US exporters of the barriers of trading partners are miscalculated, as clearly reported by several sources after the Rose Garden announcement.
But MFN was not embraced by the world trade system recently, nor was it adopted for ideological reasons. It is not part-and-parcel of what some would call “free trade dogma”. It was adopted by non-ideological trade diplomats for practical reasons. Let’s review the history.
The 19th century roots of most favoured nation
The source of the GATT regulatory framework is the bilateral agreement between France and Great Britain in 1860, the Cobden-Chevalier treaty. For the first time, and in contrast with earlier versions which date back to medieval times, this treaty introduced the MFN principle without conditions of reciprocity. This was dubbed “unconditional MFN” (see notes to Figure 1 for definitions).
Why did those 19th century dealmakers embrace unconditional MFN? Efficiency and simplicity is the answer. By extending concessions automatically to all new partners, France and the UK avoided the administrative and political complexities of (1) maintaining multiple tariff schedules and (2) renegotiating with all existing partners after a deal was struck with a new partner.
Unconditional MFN also encouraged multilateralism – or what today would be called plurilateralism. Although the initial agreement was bilateral, the unconditional MFN approach gave subsequent negotiations a quasi-multilateral character, creating a network of agreements that indirectly expanded the reach of every deal. By 1875, almost all of Europe had entered MFN agreements with more than three countries.
Figure 1 Countries involved in trade deals in Europe 1875: Bilateral deals (in yellow) and deals involving more than three countries (blue)
Note: The figure represents countries that have concluded bilateral treaties including the most favoured nation clause. Definition of unconditional and. conditional MFN: Unconditional MFN means that any trade concession (e.g., a tariff reduction) granted by one country to another must automatically be extended to all countries with which the granting country has MFN agreements, regardless of whether they reciprocate. Conditional MFN, by contrast, allows a country to extend trade benefits only to those partners who provide reciprocal treatment. This version ties MFN status to the willingness of the trading partner to offer comparable concessions.
Ricardo and unconditional MFN
The implementation of unconditional MFN was partly the consequence of a radical change in the dominant view of the purpose and impact of international trade. The 18th and 19th centuries in the UK were of course the time of liberal thinkers like Adam Smith, David Ricardo, and other classical economists who managed to establish trade theories based on the idea of comparative advantage.
Policymakers like Robert Cobden had totally adhered to the belief of free trade as a booster of the global economies and battled fiercely to establish such principles in political circles. Trade liberalisation was also seen as a way of reducing inequalities, the rents of the landlords and the agrarian classes in favour of the new urban classes. To paraphrase Irwin (1996), this period established beyond a doubt among theoretically inclined analysts of economic policy the presumption that free trade enabled a country to acquire a much greater quantity of goods.
In this respect, especially the UK and then also France – the two hegemons of the time – aimed at promoting free trade beyond the boundaries of their empires as a source of enrichment per se, with no need for reciprocity. The creation of a free trading space was seen as a public good to the benefit of all parties.
Note that this was a radical departure from the earlier mercantilist vision of trade that had held sway since the Roman Empire – the view that trade was a source of political and economic power and therefore any concession in the opening of own market had to be reciprocated with equivalent entry conditions in the market of the trade counterpart.
Nationalist backlash and back to unconditional MFN
It is well known that the nationalist backlash at the turn of the 19th century brought new trade barriers and wars. The subsequent, very relevant episode that brought back into the picture the principle of non-reciprocal MFN was what happened in the US in the early 1930s.
The US Congress came to see that its massive tariff hikes of 1930 – the Smooth-Hawley Tariffs – were an historic mistake that didn’t protect the American economy, they harmed it. This realisation didn’t come as quickly as Donald Trump’s realisation; it took years instead of days.
The 1934 Reciprocal Trade Agreements Act (RTAA) marked a dramatic shift in US trade policy, reversing the tide of protectionism that had dominated since the late 19th century and culminated in the Smoot-Hawley Tariff Act of 1930. The RTAA represented the reintroduction of the liberal philosophy in trade policy: that reciprocal tariff reductions – negotiated bilaterally and sector by sector – could promote economic recovery, expand exports, and reduce international tensions.
For the first time reciprocity was no longer seen in absolute terms – identical tariff levels – but as equivalent marginal reductions of duties, and tariff levels could keep differing. Precisely the principle that, ten years of devastating wars later, would be enshrined in the GATT regulation: reciprocal concessions meant changes in trade policy that brought about equivalent gains in trade expansion (Bagwell and Steiger 2002, Bhagwati 1998).
At the same time, of course, the extension of MFN to other trade partners that subsequently joined the agreements was consequently unconditional, again granting non-discriminatory trading conditions in all countries of destination forming part of the agreement.
The intellectual foundations of the RTAA were those that had triggered the Cobden–Chevalier treaty and were moreover grounded in the belief that high tariffs had exacerbated the Great Depression by reducing international trade and provoking retaliation. Policymakers in the Roosevelt administration, especially Secretary of State Cordell Hull, argued that trade liberalisation could foster economic interdependence and peace. Hull believed that prosperity and stability were tied to open markets and that protectionism had not only deepened economic malaise but also intensified geopolitical rivalries.
A central feature of the RTAA was its bilateral and sector-specific structure. Negotiations were conducted country by country, focusing on specific products where mutual interest could be identified. This pragmatic approach made agreements politically feasible: domestic industries were more likely to support liberalisation if they saw clear export gains in return. Reciprocity was not just a diplomatic principle but a political strategy to overcome the entrenched protectionist coalitions in Congress. But by not imposing identical conditions of access in absolute terms, it was also a powerful tool to attract countries that wanted to preserve some protection of their industries.
The success of the RTAA was evident in the 21 reciprocal trade agreements signed between 1934 and 1940. Although it was certainly unable to promote peace in its immediate aftermath, it laid the groundwork for postwar trade liberalisation and inspired the multilateral approach later embodied in GATT. The RTAA’s blend of first difference reciprocity, sectoral focus, and executive-led negotiation created a new template for American trade policy – one that balanced political pragmatism with economic openness.
Concluding remarks
Moving from history to the here and now, we believe there is one key, compelling, and overwhelming important lesson to be learned to avoid the global trade chaos of the 1930s. As policymakers navigate the fallout of the Trump-era tariffs, clarity must prevail. The rules and norms enshrined in the GATT framework – marginal reciprocity and unconditional MFN – are not mere historical curiosities; they constitute the bedrock of a stable and prosperous global trading system.
The recent erratic swings in US trade policy underscore an urgent need: recommitment to these foundational principles. Only by reaffirming these commitments can the US restore predictability to trade relations, mitigate economic uncertainty, and avoid repeating the damaging system decline.
Trade with the US accounts for less than 15% of world trade. If the rules-based trading system continues to work for the remaining 85%, we can avoid a 1930s’ situation. That should be the first priority – preventing the emotional rollercoaster from inducing other nations to slide into America’s mercantilist tariff policy.
References
Bagwell, K and R W Staiger (2002), The Economics of the World Trading System, The MIT Press.
Bhagwati, J (1988), Protectionism, The MIT Press.
Bown, C, R W Staiger and A O Sykes (2017), “Multilateral or Bilateral Trade Deals? Lessons from History”, in C Bown (ed.), Economics and Policy in the Age of Trump, CEPR Press.
Clayton, C, M Maggiori and J Schreger (2025), “Putting Back Economics into Geoeconomics”, SocArXiv.
Irwin, D (1996), Against the Tide: An Intellectual History of Free Trade, Princeton University Press.
Marchetti, J and M Roy and L Zoratto (2012), “Is there Reciprocity in Preferential Trade Agreements on Services?”, World Trade Organization Economic Research and Statistics Division.
White House (2025), Executive Order No. 14257, 90 Fed. Reg. 15041 (7 April 2025).
